Weaker oil prices weigh on Asia, Europe set to open flat

Global equity markets started the week on a positive note yesterday, retesting the top end of their recent ranges as optimism continued to grow that the easing of lockdown measures, and the decline in infection and death rates across Europe, would mark the end of the beginning of a long road back to normality.

All across Europe the daily death rate fell to its lowest level in weeks, from the UK, Germany, France, Spain and Italy.

In the US the S&P500 closed at its highest level since March 10th, as states and counties across the US prepared the ground for some limited reopening of their respective economies.

Asia markets underwent a rather more mixed and cautious session as further declines in oil prices weighed on sentiment and this looks set to translate into a similarly cautious open here in Europe. While US markets appear to be much more exuberant, investors elsewhere appear to be adopting a much more cautious approach, when it comes to pushing up beyond their recent range highs.

While cautious optimism continued to prevail in equity markets, it would appear that oil markets didn’t get the memo, with US WTI crude prices diving 25% over concern that any rise in demand from a restart in economic activity would be insufficient to work off the overhang of supply at a fast enough rate to prevent wholescale shutdowns and bankruptcies across the US shale patch.

The sell-off in US crude prices wasn’t helped by the news that the US oil fund would be selling off all its June contract exposure in favour of longer-term delivery contracts in the coming days.

The current divergence between equity markets and oil markets probably has more to do with the prospect of further stimulus measures from central banks, after the Bank of Japan extended the scope of its bond buying program yesterday, and ahead of the start of this week’s meetings of the US Federal Reserve, which starts today, and the European Central Bank who meet on Thursday.

While stocks have continued to take comfort from the largesse of central banks the economic data has gone from bad to worse and unlikely to get better in the short term, which means that investors appear to be banking on a quick return to normal as governments slowly relax restrictions.

This seems unlikely though the approach of the summer months, and warmer temperatures may well help keep a lid on a rise in infection rates in the short term.

A U-turn by Chancellor of the Exchequer Rishi Sunak on 100% tax payer backed loans for small businesses has also helped build confidence that any hit to the UK economy could well be short-lived.

Today’s economic data is expected to reinforce the hit to the UK consumer with the latest CBI retail sales numbers for April expected to show a sharp drop to -40, from -3 in March.

In Spain the unemployment rate for Q1 is expected to rise from 13.78% to 15.65%, though in truth it is likely to be much higher than that now.

The US is expected to show a further sharp fall in US consumer confidence for April with a sharp fall from 120 to 88, with the sharp rise in jobless claims being behind an expected precipitous fall to a five-year low.

EURUSD – continues to range trade, pulling off support at the 1.0720 area from last week. The current rebound needs to take out the high two weeks ago just below 1.1000. Bias still remains to the downside while below 1.1000.

GBPUSD – finding resistance just below the 50-day MA at 1.2475, as well as the 1.2500 area. We need to move through 1.2500 to signal further gains towards the 200-day MA at 1.2625. Support remains down near last week’s low at the 1.2270 area.

EURGBP – drifting back towards support at the 0.8680 area, this needs to hold or risk further declines towards 0.8620. Resistance currently comes in at the 0.8780 area as well as the highs last week at 0.8870.

USDJPY – the support at the 106.80 area remains a key level given it has held since the middle of March. The lack of any significant rebound since then suggests pressure is building for a decline towards the March lows, and potentially lower towards 105.00.

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